Options for bear market ( pun intended.. )

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IndyJonerJr

hi guys

New to options.. well sorta.

Wondering who has been through a bear and can explain or tell more on volitlity during a downturn.

Logic just says at 20% drop get in some stocks and buy puts and pull at 40-44% drop. But experience tells me that doesn't equate with vol. and time decay.

Wondering what the volitility levels are in a downturn. Do they reach 300-600% ?

Trying to plan my options how money is made in options with downturns. Is it "better" to sell weekly premium far out of the money or would it be simplistic to buy puts on shit you think will sink harder and faster. There would be no way I would want to try to time the bottom either ..

Can someone tell me the best options strategy they've seen for downturns? I like to keep things simple as I can also..
 
IndyJonerJr said:
Logic just says at 20% drop get in some stocks and buy puts and pull at 40-44% drop. But experience tells me that doesn't equate with vol. and time decay.
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After 20% drop, the puts will be very expensive. if you want to buy them for protection, the time to do it is now when VIX is around 10-11.

I would recommend to maintain some positive vega exposure. Our pre-earnings straddles provide excellent black swan protection while being profitable on their own.

You can also buy some OTM puts to hedge your long portfolio, but of course there is a cost to do it.
 
I hold no stock or anything. Cash. As I sell weekly premium...

So I do understand those who got in before the drop make mega. But can you make buying them 20% down and selling off after say 40% decline? When you say they are expensive, won't they just become more expensive?

What am I missing here
 
I think shortening your time frame when you suspect the market is starting to turn over is a good idea.

Definitely keep the majority of your trading account in cash.

If you do naked options, adding some cheap wings on the bottom would be helpful. Once we get a decent drop (3%+), I'm going to consider the market to be entering a new phase and will require much convincing that the bulls will pick back up where they left off. I would love for the market to just chop heavily for 12 months (wouldn't that be great?).

If you become confused/worried/sleepless, simply sitting on the sidelines and watching the world burn wouldn't be the dumbest strategy either. It's easier to call the bottom than the top. You'll make your biggest money after the crash when you see life (volume buyers) returning to the market.

I don't own any stocks in my trading account either right now but you can believe I will own everything after the dust settles. I acted like a scared little fool back in 2008. Buffet or somebody was using the rationale that if the stock market goes to zero, we've got a helluva lot more to worry about than our portfolio values. So when this mother crashes again, you better believe I'm going to back up the truck on the quality names that have gotten hit hard. If I lose everything and the market really does go to zero... well, I've got plenty of guns and ammo. :)
 
IndyJonerJr said:
I hold no stock or anything. Cash. As I sell weekly premium...

So I do understand those who got in before the drop make mega. But can you make buying them 20% down and selling off after say 40% decline? When you say they are expensive, won't they just become more expensive?

What am I missing here
More...

Sure - if the market continues dropping from 20% to 40%. DO you have a reliable way to know that? How many times the market dropped 20% and then reversed? Even if it reverses slightly and then continues lower gradually, your puts might still lose, depending on timing and strikes.

As usually, you buy insurance when it's cheap, not after your house is already on fire. Most of the time it's already too late.
 
Very true. I don't know 100%. I would be going off of some old info from Jesse Livermore. Does it apply. Don't know. I guess if you're right you call it instinct. If you're wrong you call it bad timing. I will make a gamble as this market is long and with everyone ready to jump ship on some of those 300% gains they want to lock. once one jumps everyone does. 10% are nothing. When I see everything slide 20% I'll call as my experience has shown me steep drops are fine. Gradual decline is the point I take aim and see if I hit

As to the question. Won't the strikes just keep going up in value if it was a bear market?

When I use to buy calls I bought deep in the money. So I guess I would do the same. Although I hear OTM into ITM makes more return but then you would have to be right on timing that part also which is a luxury to buy deep ITM I guess or dumb. Either way I've seen 50% in week with regular calls. So I would assume a hundred percent would not be uncommon even having bad timing???

I'm just wondering if the logic holds true to buy puts in bear or what is the gameplay people are making to buy their yacht.
 
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The craziest implied volatility that I have seen was the crash of '87. Much of that was artificial since B/A spreads were Holland Tunnel wide and you couldn't transact since the haircut was more like using a guillotine.

At that time, I didn't know enough then to take advantage of it, so I just just about ate every short put position that I sold on expiration Friday, the day before the crash (assigned and bought all of the stocks). Fortunately, it ended up being a flat year so the damage was fairly short lived.

In a bear you want to be long puts whether it be outright long or in combo strategies like verticals, diagonals, etc. As your long puts appreciate, roll them (or the combo) down and possibly out, booking gains and reducing exposure. Pyramid them a bit if you're succeeding. With the combos, to some some extent, what you overpay for your longs (higher IV) will be offset by your shorts.

It doesn't address your question but in 2008-2009, in order to take advantage of the severe volatility, I ran a long/short correlation portfolio for myself, shifting more L or S intraday and restoring my desired ratio by 4 PM. It provided outsized gains, the likes of which I never saw before or since. Now, I feel like the Maytag repairman, waiting for another call like that one. :-)
 
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IndyJonerJr said:
would it be simplistic to buy puts on shit
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Trying to guess where a falling market will bottom is tricky. Instead, I try to reduce my exposure before the market begins falling. No one has a crystal ball, but there are times when it is less risky to have market exposure than others. If you want to play a drop, I'd suggest taking advantage of the high IV by selling a put spread if you think the drop will reverse or call spread if you think it will continue. That way, even if the market goes sideways for a while, you can still make money.
 
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